Tuesday, September 07, 2010

Why Americans Don't Save

Much has been written over the past several months about the low saving's rate of Americans; yet little has been written about the obstacles to saving that have been put in place. The Dallas Morning News, on the 10th of August, ran a piece under the headline: Middle-class security displaced by uncertainty. The piece begins with the following sentences:

Until recently, being middle class in America meant a measure of security: a chance to get ahead and, hopefully, a leisurely retirement.

That security is eroding.

Even as pay raises have been limited, some household expenses ... are skyrocketing. Meanwhile, employees are taking on more responsibility for health care expenses and funding their own retirements ...

Many families struggle to make do even as they continue to earn more. It takes a delicate balance to make ends meet ...

I find it strange that no one in the economic community has come forth with criticism of the American economic practices that have led to this situation, for the economic consequences are huge. An economy that depends upon consumption for almost three-fourths of its GNP cannot prosper if both the lower and middle classes struggle to make ends meet. There are no conditions under which those people can be big spenders.

But, you know, there is something even odder about saving in America. The word save is classified with words such as preserve and conserve. It means to keep free or secure from injury, decay, destruction, or loss (Merriam-Webster Dictionary of Synonyms). But all forms of saving in America involve risk, which is defined as the chance that an investment will shrink or not grow. Saving in America does not secure your money from decay or loss. Even bank certificates of deposit are subject to the risk of loss because of inflation. Americans simply have no vehicle for genuine saving. All the forms of saving available are risky and thus are a form of wagering rather than genuine saving. That no economist seems to have pointed this out baffles me, for logically it involves an absurdity.

Currently, an investment such as a certificate of deposit loses value as inflation increases, and Americans are told to put aside savings today for use on some future date. But what one puts away today will buy considerable less on that future date. Some of the investor's savings will have simply disappeared.

But now consider this analogy. Suppose we had an economy in which inflation was non-existent. In this economy, the money you save today will have the same value a year from today, five years from today, et cetera. Now suppose someone, an economist, broker, government official, told us that we should withdraw a certain amount of money from our savings at regular intervals and destroy it so that its purchasing power could not be utilized. Wouldn't we all question his sanity? Wouldn't such a suggestion be absurd? Yet this absurd advice has been built into all the saving vehicles available to Americans. In America, no one saves for his/her future; he/she gambles for it. In America, saving provides no security. As Tom Hertz, a professor of economics at American University, has put it,

The volatility, the instability of economic life, has increased, fewer people are moving ahead, and a lot of people are feeling insecure, as indeed they should!

And who benefits from this? Certainly not the investor.

Think carefully about inflation, which can be defined as increasing prices. There are three scenarios for it: First, prices and wages go up commensurately. On the whole, no one gains. Second, wages are increased at a rate larger than prices. The wage earner benefits, but this kind of inflation is rare indeed but is the basis of a booming economy. Third prices are increased at a rate larger than wages. The seller benefits, which describes the most common scenario that is the basis of a recessionary economy.

So now we have this situation. Inflation benefits the seller and injures the investor and buyer. Not a happy situation. (Yes, I realize that I am ignoring the increased value of investments based upon returns. But since returns are never guaranteed, I am working with the pure logical case.)

To correct this situation, a vehicle for genuine saving is needed, one that is not subject to risk. Such a vehicle would not be difficult to create. Take bank certificates of deposit, for instance. Such deposits could be adjusted regularly to preserve their real dollar values and could earn a modest but secure return. The banks holding these deposits could use them in risky ventures just as they do now. But that kind of use of the holdings would be the banker's choice, with full knowledge of the risk which he should bear all of, since it is his choice.

I suspect that we would see a lot more saving, experience a lot less insecurity, and build a secure and growing economy if such a vehicle were available.

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John Kozy is a retired professor of philosophy and logic who blogs on social, political, and economic issues. After serving in the US Army during the Korean War, he spent twenty years as a university professor and another twenty years working as a writer. He has published a textbook in formal logic commercially, in academic journals and a small number of commercial magazines, and has written a number of guest editorials for newspapers. His on-line pieces can be found on http://www.jkozy.com/ and he can be emailed from that site's homepage.